After a calmer start to the week in geopolitics, US-Iran tensions erupted again on July 18 when President Donald Trump said the US Navy had shot down an Iranian drone in the Strait of Hormuz.
Brent crude prices responded with a near 2% increase by in Singapore morning trading hours.
However, the impact of US sanctions on Iran and hostilities in the Persian Gulf on oil prices has been blunted by a global supply glut, according to a US official. Brian Hook, the US State Department’s special representative for Iran, told S&P Global Platts in an interview that buyers were having no difficulty finding replacement barrels for Iranian crude.
Aside from supply fundamentals and the heightened risks for tankers in the Middle East, during the week there were further reminders of the wider existential crisis facing the global hydrocarbons industry in an age of energy transition and environmental awareness.
S&P Global Ratings said in a mid-year note that the number of oil and gas companies in distress is rising. The agency said declining interest from investors meant consolidation in the sector may not be a solution, leaving bankruptcy as the only option for some.
Meanwhile, legislators continue to push for more aggressive emissions curbs, with the new European Commission president, Ursula von der Leyen, saying she would propose a legal target of net zero CO2 by 2050. Von der Leyen made the comments shortly before being approved as president on July 16. The EU currently has a non-binding goal to cut emissions by at least 80% from 1990 levels by 2050.
GRAPHIC OF THE WEEK
Click for full-size infographic
WATCH: RUSSIAN GAS IN EUROPE
Russian gas has dominated Europe’s supply mix this summer, flowing in by both land and sea. Given economic and political motivations, these flows are unlikely to abate. It’s a dynamic that has already begun to push LNG away from European markets, says Samer Mosis, S&P Global Platts senior LNG analyst.
Demand for recycled plastics over the longer term is expected to grow, but the second half of 2019 will test the European market’s true commitment to using recycled plastics, amid challenging economics.
Ports in Guangxi in southern China and the country’s Jingtang port halted custom declarations for all coal imports effective July 15. The move came on the heels of similar curbs at a northern port, stoking fears among market sources of wider restrictions for imported coal.
The US Senate Energy and Natural Resources Committee passed a bill July 16 supporting advanced nuclear reactor deployment, by allowing the federal government to sign long-term power purchase agreements and calling for deployment of new reactor designs at government facilities.
THE LAST WORD
“VLCCs are the sexy, big vessel that everybody’s talking about, but the workhorses are going to be primarily the Suezmax-class vessels. Most crude today globally is moved on the Suezmax.”
– Sean Strawbridge, CEO of the Port of Corpus Christi, Texas, in an interview with S&P Global Platts. Strawbridge outlined the port’s ambitions to capitalize on growing US crude oil export volumes, and Asian buyers’ appetite for a mix of US grades.
Iron ore, the “red dirt” that is the key ingredient for the manufacture of steel, is attracting significant interest again, both internationally and within China.
Its price has just seen one of its sharpest ever rallies, almost doubling in value over seven months to hit $126.35/mt on July 3, responding to a confluence of supply and demand-side factors.
While the price seems to have subsided in recent days, the intensity of the jump has surprised many, who say that the market has effectively disconnected from its fundamentals. A deeper look at the market’s current key drivers may provide some answers.
At a macro level, there have been several factors impacting the supply of iron ore this year, most notably ongoing ramifications of reduced output from Brazil following the Vale dam disaster, coupled with residue impact from Cyclone Veronica hitting Australian production.
Against this backdrop, demand from Chinese steel manufacturers remains robust. While long-term term contracts are being fulfilled, the price of marginal iron ore traded on the spot physical markets has increased, reflecting tight supply and strong demand.
Bright spots on supply side
Buyers point to the fact that Brazil’s Vale restarted operations at its Brucutu mine in late June, with the full resumption of wet processing after a drawn-out legal tussle, thereby reducing uncertainty over the longer-term supply of low-alumina iron ore.
“Since the Vale accident, our term contracted volumes have not seen any significant impact. There have been lower spot volumes in the market for products like BRBF, but there has not been any real concern with regards to our long-term supply,” one large-sized Chinese steel maker said.
Additionally, the Australian supply chain is recovering, with spot supply volumes from Down Under showing signs of improving. Total iron ore shipments out of West Australia hit 22.1 million mt in the week of June 24 and BHP contributed a year-high of over 7.5 million mt. So why are prices still so elevated?
Despite this light at the end of the tunnel, certain supply constraints look set to remain. Vale has stated that it expects its sales volume guidance for FY 2019 to be at the midpoint of its earlier projection range of 307-332 million mt, which still marks a sizeable cut from loftier projections of 400 million mt before the accident.
”The Brucutu start will help the market but I don’t think it will be followed by a swift restart of Timbopeba and Alegria. We are expecting Vale to fall in the bottom range of their guidance,” Serafino Capoferri, a research analyst from Macquarie Group, told S&P Global Platts in an email last week.
“I think the worst is over in [terms] of physical tightness. But with Rio & BHP output down year on year, 60 million mt of capacity still offline in Brazil and feeble supply response from high cost producers, the market will stay tight and prices will likely average above the cost curve in the second half of 2019,” Capoferri said
“In short – I think iron ore is sticky near term, the market is not what it used to be,” he added.
Aside from the current market expectations of tight spot supply from Australian miners in July and August, there are views about a residue impact from Cyclone Veronica earlier in the year.
“There were disruptions to mining operations and shipments following the cyclone, but a rather unsustainable ramp-up in production afterwards might have contributed to current issues faced in the form of worsening specifications for mainstream medium grade fines,” one international trader said.
Rio Tinto adjusted its guidance on 2019 Pilbara shipments to 320-330 million mt, from 333-343 million mt, after experiencing mine operational challenges resulting in a higher proportion of lower grade products.
Spot availability was clearly dented by Veronica as well as the Brazil dam disaster, trade activity observed by S&P Global Platts shows. The number of Australian and Brazilian spot cargoes transacted during the second quarter of 2019 was 34% lower than in Q1 2019, and 30% lower than in Q2 2018.
China steelmaking drives demand
Meanwhile on the demand side, steel output has been strong, and the signs are that this will continue at least until margins turn negative. Over January-June, China’s pig iron and crude steel production increased by 7.9% and 9.9% year on year to 404.21 million mt and 492.17 million mt, annualizing at 808 million mt and 984 million mt, respectively.
In a bid to remove itself from the list of the 10 most air-polluted cities in China, Hebei province’s Tangshan city will order 20-50% output cuts at sintering plants, blast furnaces and converters until the end of July. Otherwise, no steel mills have indicated that they plan to reduce production in response to the margin squeeze. As a result, China’s steel production is expected to stay high, which could provide some support to iron ore prices.
While unseen in recent years, the kind of volatility from recent weeks will be familiar to iron and steel industry veterans, who know that this simple “red dirt” can indeed be prone to significant price moves.
The leap this year followed a lengthy period of stability, with prices mostly oscillating between $50-80/mt as far back as late 2014. During this period, supply kept pace with rising demand from Chinese steel mills, as their profit margins improved on the back of China’s steelmaking capacity cuts.
But between 2008 and 2014, the market saw a series of wild moves, starting during the global financial crisis, when prices fell from $170/mt to $55/mt in just three months. Prices didn’t stay low for long, yo-yoing back to $186/mt in just over a year in April 2009.
Thereafter, the market saw sharp swings in either direction until the start of 2014, when strong supply and a slow decline in steel prices started to act as a drag on iron ore.
”Previous price swings were more driven by strong demand moves, generally China led. This one is more supply driven following the Vale outages. The one thing that is similar is that, given how steep the iron ore cost curve is, prices tend to have to move a long way, either up or down, to invoke a suitable supply reaction,” according to Colin Hamilton, an analyst at BMO Capital Markets.
As the old saying goes, the best cure for high prices is high prices. These should eventually incentivize additional supply, which will eventually translate into lower prices. As so often in commodity markets, the key question is when.
Deploying more of the Royal Navy to protect oil tankers from Iranian attack as they sail through the Strait of Hormuz is a short-term fix to a historic problem of providing energy security in the Persian Gulf.
Instead of Britain adding to the crowded fleet of warships converging on the region, new export routes such as pipelines and canals should be opened up to provide long-term peaceful alternatives that would finally reduce the world’s dependence on the narrow 21-mile-wide channel dominated by Iran’s Revolutionary Guards.
Slightly more than 20 million b/d of crude oil – around a fifth of the world’s supply – is shipped out of the region under the gun sights of Iran’s hardline military forces, now overlooking the channel that is currently policed by the US Fifth Fleet. US President Donald Trump wants this to change, and has called for a larger international force to be established to protect the chokepoint, or pay for it, after a series of attacks on oil shipping and threats followed US sanctions on Iran.
The most recent skirmish occurred this week when HMS Montrose was forced to head off Iranian forces allegedly threatening the BP-operated tanker British Heritage. The incident – denied by Tehran – followed the UK seizure of an Iranian vessel near Gibraltar suspected of busting western sanctions on Syria. Both episodes show the real risk of events getting out of control in the Persian Gulf, but it doesn’t have to be this way in the future.
Click for full-size infographic
Blueprints have existed for years to construct a giant canal stretching from Dubai to the east coast of the United Arab Emirates, which would allow tankers to avoid the strait altogether on their way to international markets. The scheme initially emerged just over a decade ago when Dubai’s government briefly considered the estimated $200 billion canal dreamed up by British engineers.
If built, the waterway would have stretched for 225 miles across the interior of the emirates and over the Hajjar Mountain range south of the oil port of Fujairah. Like the Suez Canal – linking the Red Sea to the Mediterranean – the cost of construction could have been recovered over time and additional revenue would be generated by charging vessels for its use.
However, the project was eventually mothballed after being deemed unnecessary and too expensive by the emirate’s sheikhs. They may have been right. Towards 2040, global oil demand may peak because of climate change measures and transport electrification. But similar canal schemes continue to resurface, including a proposal floated by a Riyadh-based think-tank in 2015, to build an even longer canal to convey Saudi Arabia’s oil across the desert to ports on the Red Sea coast. Of course canals take time to build, but pipelines already exist.
Alternative oil routes
Most of Saudi Arabia’s oil exports of just over 7 million b/d are loaded at the country’s Ras Tanura terminal in the Gulf. The kingdom – which despite US shale remains the world’s largest exporter – has alternatives. Its 750-mile-long East-West pipeline, also known as Petroline, linking its oil production to the Red Sea, has the capacity to transport up to 5 million b/d of crude to export terminals and refineries around the industrial port of Yanbu. Of course, pipelines can also be attacked. Petroline was targeted by Houthi militants from Yemen earlier this year.
Abu Dhabi too has a major pipeline capable of transporting a large share of its exports outside the Strait of Hormuz. Opened in 2008, its Fujairah link connects the port on the Arabian Sea with its major production center in Habshan. The pipeline has capacity to transport 1.5 million b/d of crude and could eventually feed a huge 40 million barrel strategic storage facility soon to be blasted out of the mountains. Abu Dhabi is also building a new industrial railway, which could feasibly be used in emergencies to transport oil overland for export from the Persian Gulf to the UAE’s less exposed east coast. However, recent attacks on ships anchored near Fujairah proves even this remote enclave isn’t impervious.
The emirate’s rulers have good reason to fear Iran’s ability to cause havoc near their shores. As the British prepared to withdraw from the region in the early 1970s, Tehran under the rule of the Shah seized the opportunity to take control of three Emirati islands in the Gulf. The status of Abu Musa and the Greater and Lesser Tunb remains an open wound. The countries coexist in a permanent state of distrust.
Iraq – and Europe – exposed
Iraq – which fought a bloody war with Iran during the 1980s – is also being held hostage. OPEC’s second-largest producer exports almost all its crude produced in the south through the Strait of Hormuz. Baghdad is now hurriedly pushing for the construction of an oil export pipeline to the Jordanian port of Aqaba on the Red Sea, far from Iran’s potentially disruptive influence.
However, Britain’s biggest exposure to Iran closing access to the Persian Gulf risk is Qatar. The sheikhdom is the largest supplier of liquefied natural gas (LNG) in the UK, which can only be shipped in chilled form onboard gigantic tankers. In June, LNG mostly from Qatar accounted for 30% of British imported gas supplies.
“Unlike Saudi Arabia and Abu Dhabi, Qatar has no alternative export routes which bypass the Strait of Hormuz,” said Samer Mosis, senior LNG analyst at S&P Global Platts Analytics. “Given the sheer breadth of Qatar’s role in global LNG markets, any interruption of the waterway would effectively block as much as a quarter of global LNG supply from ever reaching key markets, including Europe.”
The stakes are high for the global economy and Iran’s leaders know it. Instead of adding to the tension by committing the Royal Navy to an almost impossible mission, focusing minds and money on finding alternative export routes by building new pipelines and even canals to bypass the Strait of Hormuz could be a safer solution.
S&P Global Platts editors’ pick of unfolding commodities trends. This week, bunker values at Fujairah plunge, mine overcapacity puts pressure on key battery metal lithium, and US LNG exporters face tight margins over the summer. Plus Chinese refiners’ growing taste for Saudi crude, EU CO2 prices and gas and coal profitability.
1. Fujairah bunker values plunge as Middle East risk rises
What’s happening? Marine fuel sales in the Port of Fujairah are estimated to have dropped about 16% in the second quarter versus the first quarter, on continued tensions in the Middle East. Recent alleged tanker attacks in the region have weighed on market sentiment, industry sources have told S&P Global Platts. Fujairah is among the world’s top bunkering hubs and lies outside the Strait of Hormuz, which handles about 30% of the world’s seaborne crude.
What’s next? Singapore has witnessed an increase in demand due to a slight switch in volumes from Fujairah against a backdrop of tight supply-side fundamentals in the world’s largest bunkering port. War risk premiums in the Middle East have also risen after recent tanker attacks, contributing to weaker bunker sales in Fujairah, and the spotlight will remain on the region as geopolitical risk and Iran sanctions keep the oil market on tenterhooks.
2. Lithium prices continue down on mine overcapacity
What’s happening? Lithium demand is expected to continue to grow between 14% and 16% annually. However, prices are falling from a 2018 peak after miners piled into the market, looking to capitalize on the growing need for battery metals for the electric vehicle sector. Lithium hydroxide has been under pressure because of an oversupply of spodumene. The lithium ore is more frequently converted into hydroxide.
What’s next? Market participants say there is an excess of spodumene production capacity and too little conversion capacity. But more processing capacity is expected to come online outside China, which could ease refining bottlenecks.
3. US LNG exporters’ margins squeezed this summer
What’s happening? The weighted-average netback for US LNG exports is at its lowest in over three years this month at an estimated 14 cent/MMBtu, data from S&P Global Platts Analytics shows. The netback for US exporters has been on a steady decline since September when the Platts JKM benchmark reached a multiyear high at over $12/MMBtu. Tepid demand growth in Asia, and limited capacity in Europe to absorb both strong Russian pipeline volumes and incremental LNG, have left much of the new supply from the US and Australia searching for buyers. Platts Analytics’ netback calculation factors in the cost of feedstock gas, onshore transport, shipping and related fees, but excludes sunk costs associated with liquefaction.
What’s next? The Stronger demand for early-winter cargoes should help to lift the netback on US LNG exports by later this year. JKM swaps for November are currently priced at over $6/MMBtu and first-quarter 2020 in the mid-$7s/MMBtu. At those prices, the netback on US exports would rise to about $2/MMBtu.
4. Gas more profitable than coal in European power generation
What’s happening? The TTF Winter gas price is trading below the European coal switching price index (CSPI) and is expected to continue to trade at a discount in the near future. The CSPI is the theoretical threshold for a 50%-efficient, higher heating value gas-fired power plant to be more profitable than a 35%-efficient coal-fired power plant including emissions. The TTF discount means that gas for use in the power generation sector will theoretically be cheaper than the use of coal through the winter, having already proven to be cheaper in the summer months.
What’s next? Gas prices are at historically low levels despite having rallied in the past week, but how those prices evolve in the coming months will define how profitable gas-fired power generation will continue to be. The movement of the coal price and the trend for CO2 allowance prices are also indicators to watch – both are key to the CSPI.
5. Saudi crude makes inroads with Chinese independent refiners
What’s happening? Saudi Arabia’s crude oil exports to major Northeast Asian customers have suffered so far this year amid stiff competition from light sweet US crude cargoes flooding the Asian market and OPEC’s ongoing production cut commitment. But Saudi Aramco maintained a solid market share in China during the first half of 2019, with demand from China’s independent refining sector playing a crucial role. Aramco’s recent shift in strategy to diversify its customers has paid off, as the supply increments to China in H1 were mostly attributed to new customers in the independent refining sector – Zhejiang Petrochemical Co. and Hengli Petrochemical (Dalian).
What’s next? Saudi Arabia will likely continue to compete against Russian barrels to protect its market share in China. China’s state-run and independent sectors continue to favor Far East Russian ESPO blend crude for the grade’s attractive price tag and close supply proximity.
6. EU CO2 prices soar on gas price, Germany’s threatened allowance cuts
What’s happening? EU carbon dioxide allowance prices hit an 11-year high July 10, driven by a combination of factors including fresh signs that Germany could cancel allowances linked to planned coal-fired power plant closures, and scope for more ambition at the wider EU level for stronger emissions reduction targets. Carbon prices appeared to react to fresh comments by Germany’s environment minister Svenja Schulze last week who said she supports cancelling EUAs linked to coal plant closures. Adding further support, the proposed new European Commission president Ursula von de Leyen pitched more aggressive EU decarbonization policies.
What’s next? Carbon market participants will be watching closely for signs the latest gains can hold. Any fall back in gas prices could remove a supportive element for carbon. However, supply side factors continue to look bullish, with the Market Stability Reserve set to remove 397 million mt from auction supply this year, and an estimated 375 million mt from 2020 supply.
Reporting by Paul Hickin, Stuart Elliot, Frank Watson, Ben Kilbey, Diana Kinch, Philip Vahn and J. Robinson. Edited by Emma Slawinski
As of July 11, US offshore drillers have shut 1 million b/d (53%) of Gulf of Mexico oil production and 1.2 Bcf/d (45%) of natural gas output.
The US National Hurricane Center expects Barry to reach hurricane strength late July 12, or early the next day, and make landfall in Louisiana. The storm could slow US oil and LNG exports if terminals and shipping operations are interrupted.
Elsewhere, agricultural markets are monitoring progress in crop cycles, with mixed news from southern hemisphere harvests.
The soybean harvest in Argentina for the 2018-19 crop year that started in September was 100% complete as of July 3. Total soy production reached 56 million mt, up 48% year on year, according to the Buenos Aires Grain Exchange. Argentina’s corn crop is also expected to break records at 49 million mt – the harvest is now nearly 50% complete.
Australian wheat faces a tougher scenario, after a third straight year of below-average production. The smaller crop is likely to drive higher domestic prices and leave Australia vulnerable to competition from the Black Sea.
GRAPHIC OF THE WEEK
Click for full-size infographic
VIDEO: ASIAN LNG
After weak LNG demand in the first half of the year, support could be coming in the second half, as both Japan and South Korean nuclear output is expected to follow year-ago levels moving forward. S&P Global Platts LNG Analytics Manager Jeffrey Moore looks at supply and demand fundamentals affecting shipments to northeast Asia.
The outlook for the polyethylene market globally is bearish for the remainder of the year due to a combination of weak feedstock costs, weak global demand and anticipated plant startups, according to market participants.
Workers at ArcelorMittal Italia started full strike action in the early hours of July 11 for an indefinite period, on grounds of safety, and are taking action to bank the Taranto works’ blast furnaces Nos. 2 and 4.
Saudi Arabia’s balancing act of extending the OPEC/non-OPEC output cuts into the first quarter of 2020 and maintaining economic growth is being tested by weaker oil prices, with concerns of a potential economic contraction.
US LNG feedgas demand is trending near record-high levels this month as newly minted liquefaction facilities along the Gulf Coast continue to ramp up, despite narrow margins for export profit. In July, gas demand from the six operational US export facilities has averaged nearly 6.2 Bcf/d.
THE LAST WORD
“The government sees the attack on a ship operated by our country’s shipping company near the Strait of Hormuz as a grave incident that threatens our country’s peace and prosperity.”
– Kotaro Nogami, deputy chief cabinet secretary in the Japanese government, addressing press on the recent incidents in the Persian Gulf. Japan appears to be keeping its options open as the US calls on other states to join a coalition to defend the Strait of Hormuz.
Values for heavier, sour crude oil grades available on the US Gulf Coast have dropped as the outlook for global demand deteriorates, production remains strong and the deadline to implement low sulfur standards for marine fuel approaches.
The front-month differential for benchmark medium sour crude Mars plunged to WTI plus $2.40/b on June 27, which was its lowest assessed level since August 28, 2018.
The Mars differential has recovered slightly in recent days, and was last assessed July 10 at WTI plus $3.65/b. However, Mars and other Gulf Coast sour crudes have been on a downward trajectory since May. The 30-day rolling average for the Mars differential is about $4.70/b. The previous 30-day average was about $5.65/b. Mars hit a four-year high in February, when it was assessed at WTI plus $7.90/b.
Several factors could be weighing on sour crudes in the US Gulf Coast, including a lack of demand and an overflow of output. The majority of US sour crude production comes from the Gulf of Mexico, which is producing around 2 million b/d of oil – and that output is growing.
Shell announced in May that production started at its Appomattox floating production system, months ahead of schedule. The deepwater Gulf of Mexico facility has an expected production of 175,000 b/d. The Mattox Pipeline, a 90-mile system with a 300,000 b/d capacity, will move Appomattox’s output westward to the Proteus pipeline system, which moves Thunder Horse crude.
Price differentials for all crudes available on the US Gulf Coast have dropped as OPEC and its allies (OPEC+) recently struck a deal to extend oil production cuts, a move reinforced by concerns over a weak global demand outlook. As a result of faltering global demand, physical Brent and WTI crude also have decreased.
Brent’s premium over WTI last week shrunk to its narrowest point in several months. The Brent/WTI swaps spread narrowed to $5.67/b, before widening out again slightly to over $6/b.
A narrower Brent-WTI spread puts downward pressure on US Gulf Coast crude prices and could slow US crude exports as they become less competitive in the global markets.
Western Canadian crude weakens
Values for Western Canadian crude in the US Gulf Coast have also plunged. The differential for Western Canadian Select at Nederland, Texas, has fallen more than $6/b since reaching an all-time high of WTI CMA plus $3.75/b March 13 as demand for heavy crude in the US Gulf Coast spiked on the collapse of Venezuelan imports. Western Canadian Select at Nederland was assessed at a discount of $2.50/b on July 2, the low for the year, before rising to minus $2.35/b July 3.
Weekly US imports from Venezuela hit zero for the first time in the week ending March 15, according US Energy Information Administration data going back to 2010. That was down from about 587,000 b/d at the end of January, the data showed, before US sanctions took effect.
The weakening of WCS on the US Gulf Coast is partly due to more crude making it out of Canada via rail. Crude-by-rail exports out of Canada rose to 236,152 b/d in April from 168,483 b/d in March, according to the country’s National Energy Board.
S&P Global Platts Analytics expects crude-by-rail exports out of Canada to rise to around 400,000 b/d by the end of year, barring an unforeseen increase in government production curtailments.
At the same time, the total amount of crude imported into PADD 3, which includes the US Gulf Coast, reached a four-week average of 893,000 b/d in the week ended June 7, the highest in a year.
Canadian crudes have gained interest from international buyers, particularly those in Asia, as the global market for heavy sour crudes remains relatively tight amid a series of supply-side events, including OPEC+ production cuts and Venezuelan political upheaval.
While differentials for crudes on the US Gulf Coast have been pulled down by the need to stay competitive internationally, the loss of heavier barrels from Venezuela and other OPEC countries has led some refiners to use Western Canadian heavy crudes as a substitute. “The value it’s at right now makes it an attractive export even though the Brent/WTI arbitrage isn’t great,” one trader said of West Canadian heavies.
Sporadic flows of Western Canadian Select (WCS) and Cold Lake Blend (CL) have been observed going to China since 2018, according to market sources. The two Canadian heavy grades are viewed by refiners as a suitable substitute for Venezuelan Merey crude, as the grades yield high levels of asphalt.
Western Canadian Select generally has an API gravity around 21, with a sulfur content of around 3.59%, while Cold Lake Blend generally has an API gravity around 19 with a sulfur content around 4%, according to S&P Global Platts data. Merey crude has an API gravity around 15.9% and a sulfur content of 2.53%, while Venezuela’s Boscan crude has an API gravity of 10.6 and a sulfur content of 5.38%, according to Platts data.
US-based uranium market participants are anxiously awaiting a decision from President Donald Trump on whether to take protectionist action on imports of the element that fuels nuclear reactors.
Trump is weighing a decision on a January 2018 petition by US uranium producers Energy Fuels and Ur-Energy that asked him to require US nuclear plant operators to purchase 25% of their uranium annually from domestic producers, citing national security concerns of relying on uranium imported from the CIS nations. The decision is due July 15, although market sources have speculated the administration’s action may be delayed.
To guard against any sudden imposition of quotas or tariffs, potentially as soon as mid-July, companies have been buying and inquiring about buying uranium that is not mined in Kazakhstan, Uzbekistan or Russia, market sources have reported.
The interest, and a slight premium emerging for uranium from non-former Soviet republics, may presage a bifurcated market for uranium, the fuel for the world’s nuclear reactors, some market participants have said.
“People are trying to second-guess [Trump’s trade action,] or at least minimize their risks from it,” said Scott Lawrence, managing director of Numerco, a London-based uranium broker, during a presentation at the World Nuclear Fuel Markets conference in Lisbon in early June. In almost all recent uranium transactions, the origin of the material has been defined in contracts, a change from previous behavior, he said.
That makes it harder to match buyers and sellers and to concentrate liquidity, he said.
Despite the trend, any divergence in pricing based on country of origin is a “short-term blip” in the overall commoditization of uranium, Lawrence said.
Other market participants noted that there is not a significant price spread between CIS-origin uranium and material from the rest of the world, a sign the market may not be expecting much of a disruption from any Trump trade action.
Utility fuel buyers, producers, intermediaries and a consultant interviewed since late May have said they know of deals or offers where one party stipulated that uranium must not originate from Russia or the other former Soviet republics now known as the Commonwealth of Independent States, or CIS. CIS countries accounted for about 40% of uranium acquired in 2018 by US nuclear plant operators, the US Energy Information Administration said in a report in May.
The petition has sparked a bitter debate over the need for protection for the US uranium miners, with US utilities arguing that any tariffs or quotas would increase their costs at exactly the moment when power prices have made nuclear plants borderline unprofitable. A US utility group has said raising the costs of nuclear fuel could spell the demise of a number of nuclear plants.
The miners, on the other hand, have argued that nuclear fuel is an exceedingly small portion of US nuclear plant costs. They say that without protection, all US production would cease and the country’s utilities would rely on foreign suppliers who could cut off the flow of uranium for any reason.
Utilities have said there is an oversupply in uranium globally and most uranium comes from allies such as Australia and Canada, minimizing the concern that hostile suppliers could disrupt their access to nuclear fuel.
The US Department of Commerce sent its recommendations on the petition, which have not been made public, to Trump April 14. The president has up to 90 days from receipt of the recommendations to act on them, although he can extend the period. Under Section 232 of the Trade Expansion Act, Trump could require US utilities to buy a percentage of their uranium from domestic producers, impose import tariffs, or quotas, or a combination of these, or choose to do nothing.
“Some market participants are sensitive to [uranium’s] origin,” given the potential forTrump to take actions that affect the availability and/or price of non-US uranium, Tim Gabruch, vice president, commercial, for Canadian-based Denison Mines, said in an interview. “Origin is certainly something I’ve given greater consideration to in recent transactions, ” he noted.
“There have been spot requests for uranium with origins excluding Kazakhstan, Uzbekistan and Russia reported, but it has not been for large amounts,” Thomas Meade, principal with Energy Resources International, an industry consulting firm, said in a recent interview.
“Overall we have not seen any big steps taken by U.S. buyers so far, as they are mostly waiting to see what the new ’rules,’ if any, will be” after Trump announces his decision, Meade said.
One market participant said he believed the interest in non-CIS uranium began with a single buyer and then spread to some other market participants.
Avoidance of CIS uranium began in mid-May, an intermediary said in an early June interview.
Paul Goranson, Energy Fuels’ executive vice president, said in an interview, “we are seeing very preliminary and confidential” inquiries by companies he declined to identify, about buying US-origin uranium rather than Russian and CIS material.
Goranson said there is speculation that there will be no import restrictions on material originating from Canada and Australia, as those countries are US allies and have been exempted from some previous tariffs imposed by the Trump administration.
Should utilities be required to buy 25% of uranium needs domestically, a US utility uranium buyer said in an interview this month, the price of a pound of domestically sourced U3O8 could rise to between $75/lb-$100/lb.
S&P Global Platts assessed the spot price of uranium at $24.84/lb July 3, based on the mean of assessed activity for U308 delivered over the next 12 months.
Imposition of a quota would create a bifurcated uranium market, Meade said. “US origin [uranium] would see an increase [in price] in the tens of dollars [per pound], because US production is at significantly higher cost than current prices,” he said.
“Non-US origin uranium would likely see a few dollar per pound decrease” in price, he said.
The price difference now for spot uranium from CIS countries and non-CIS countries is minimal, one market participant said in early June.
Even a small premium could affect the future of US nuclear plants, Jean Shobert, director of nuclear fuel supply for Exelon, the largest US nuclear plant operator, said during a presentation at the uranium conference June 10. “Another 40 cents or a dollar on a per-megawatt-hour basis can most certainly make the difference between keeping a plant open or shutting a plant down,” she said.
When the bulk carrier New Journey was put to sea in January 2015, Myanmar was in the depths of civil war.
Clashes between the Myanmar Army and Myanmar National Democratic Alliance Army killed more than 200 people in the early months of 2015, and displaced over 50,000 civilians. The South Asian country hadn’t held an openly contested election in nearly thirty years.
Four years later, on May 9, 2019, the 177-meter-long, 36,000 deadweight tonne ship arrived at a very different Myanmar. The New Journey docked at Yangon’s newly built Thilawa International Bulk Terminal – Myanmar’s first and only terminal capable of offloading bulk commodities – after nearly a month traversing the Pacific.
The ship discharged almost 22,000 mt of US-sourced dark northern spring wheat, worth more than $6,900,000. It was the first seaborne bulk shipment of US-sourced wheat in Myanmar’s history.
Myanmar’s appetite for wheat is expanding at a rapid pace, and the country is becoming more integrated in global trade and investment more broadly. But ties with the West have been strained by a series of political and humanitarian crises. What does the future hold for this small South Asian nation?
According to the USDA’s Foreign Agricultural Service, the New Journey left Longview, Washington in April 2019 and arrived in Yangon with the cargo of wheat sold by Itochu International to Lluvia Limited – a joint venture between Capital Diamond Star Group and Mitsubishi Corporation.
Lluvia and Kamiguni, a Japanese port and logistic facilities operator, have invested heavily in building the port facility to handle grains for bulk carriers.
“Myanmar has traditionally traded grains by containers,” said JOIN, another Japanese investor in the Thilawa terminal, in a March statement. “However, as the volume increases, it is expected to shift more shipments to bulk carriers and grain silos which would reduce logistic costs on the back of larger volumes.”
Thilawa’s construction represents Myanmar’s growing appetite for Western foodstuffs, specifically pasta, snacks and baked goods derived from wheat flour, as the country moves away from its traditionally rice-heavy diet.
Since 2015, the Aung San Suu Kyi-led democratic government has prioritized economic growth and political cooperation with the West. The Asian Development Outlook 2019 forecasts Myanmar’s economy to grow 6.6% in the fiscal year ending in September 2019 and 6.8% in the following year.
As trade links have grown, wheat and grain-based food consumption in the country has increased, in turn stimulating import demand.
According to the USDA, Myanmar’s wheat imports have more than doubled since 2010 and are expected to rise a further 5% on year in 2019 to 525,000 mt, making Thilawa increasingly important to regional importers.
Since Myanmar’s first democratic election in 2015, trade with the West has boomed. US-Myanmar trading volume rose from $197 million in 2015-2016 to $690.6 million in 2016-2017, and reached $452 million in the first half of FY 2017-2018, according to the US Department of Commerce.
Myanmar’s exports to the EU increased from $600 million in 2015 to an estimated $2.6 billion in 2018, according to the European Commission. Myanmar exported more than $157 million worth of rice to the EU in 2018.
Bumps in the road
There are some hints of caution from Myanmar’s Western trading partners. Both the US and EU continue to suspend all licenses to export defense articles to Myanmar. The EU trades by way of its Everything But Arms scheme, which grants full duty-free and quota-free access to the EU Single Market for all products except arms and armaments.
Recent political decisions by the South Asian country have cooled relations, and raised questions about the government’s stability as a trading partner. State Chancellor Suu Kyi was heavily criticized by Western leaders for her handling of the Rohingya Muslim crisis in 2017. There are also reports that the European Commission is considering a formal review of Myanmar’s access to the single market.
Yet the imports continue, with the USDA reporting that importers have expressed interest in bringing further shipments of US bulk wheat into Yangon later this year.
Wilmar International, a leading agribusiness in Asia, is building similar bulk wheat handling facilities as well as a new flour mill at the Thilawa port. The mill aims to give Wilmar an added advantage over Lluvia, which faces extra trucking costs to transport the grain from the port to its mill further inland.
The Myanmar Investment Commission has permitted Wilmar International to form a local joint-venture – Wilmar Myanmar Riceland – to produce, sell and distribute rice and rice-related products at the Thilawa port in Yangon, according to local media.
The Ministry of Commerce will also allow exports of specific food and commodity items, according to Notification 24/2019 released June 6. The move targets seven items including rice, meat and fish, and value-added crops, with the aim of boosting exports of local commodities in the international market and attract foreign investment into the agriculture sector.
Wheat imports could be just the start of a whole new economy.
OPEC would be wise to avoid picking a fight with Greta Thunberg. The 16-year-old poster child of the Extinction Rebellion movement wants to bring the fossil fuel era to an abrupt end, regardless of the economic risks. Branding her populist methods an enemy could make big oil an easier target for protesters to aim at.
That is exactly the mistake OPEC’s Secretary General Mohammed Barkindo has made. The head of the oil cartel – which pumps just under a third of the world’s crude – was quoted last week saying that attacks leveled at producers by a “growing mass mobilization of world opinion” had become “perhaps the greatest threat to our industry going forward.”
Unabashed, Barkindo doubled down by arguing “civil society is being misled to believe oil is the cause of climate change.” All music to the young ears of Thunberg. The Swedish teenager described the comments as “our biggest compliment yet” in a brief tweet to her army of 723,000 followers on the social media platform.
The pithy response simultaneously drew attention to Barkindo’s imprudent choice of words, made to a pack of energy reporters at last week’s OPEC meeting in Vienna, and turned the sights of the Extinction Rebellion firmly onto the cartel, which otherwise might have gone largely unnoticed.
But, Barkindo may have a point. Thunberg’s compelling message and ability to mobilize public opinion have made her a magnet for virtue-seeking politicians eager to buff up their climate change credentials, without considering all the economic arguments at hand.
Featured on the cover of the esteemed Time magazine, Thunberg has been invited to lecture at legislatures including the Houses of Parliament and their European equivalents on the dangers of climate change despite her tender years. Invited to the UN in New York this September, she plans to get there without air travel to minimise her carbon footprint.
Politicians, corporates under pressure
Visionary, or a populist figurehead, Thunberg managed to inspire an estimated 1.6 million children to walk out of school classrooms around the world in March to demand action on climate change. Her influence has grown impossible for most democratic governments to ignore. A few months after demonstrations closed down Westminster, under fire British Prime Minister Theresa May announced a hastily drafted policy to reach net zero emissions by 2050 despite the unanswered practical challenges of abandoning fossil fuels.
Clumsily making his case for oil as a vital part of the global economy, Barkindo can’t compete with Thunberg’s star power.
“We have spent this spring and summer across European capitals where children have been mobilized to demonstrate, campaigning against our industry and oil,” he grumbled in Vienna. “They are beginning to infiltrate boardrooms and parliaments.”
Doors will get harder to open for Barkindo and an oil-producing industry that is increasingly being branded as toxic by investors and politicians alike. Access to capital is very slowly being choked off by investors who have to at least be seen complying with environmental, social and governance (ESG) principles to help limit average global temperature increases to less than 2 degrees Celsius above pre-industrial levels. Meanwhile, governments are encouraging energy transition away from fossil fuels with every tool at their disposal.
For example, Norway’s $1 trillion sovereign wealth fund is actively ditching most of its oil-producing investments. Although it draws the line so far at completely divesting, Japan’s gigantic $1.4 trillion Government Pension Investment Fund has placed an emphasis on applying ESG principles to its portfolio and is actively involved in the Group of Twenty Taskforce on Climate-related Financial Disclosures. In the UK, companies may have to publish by 2022 what risks their businesses face from climate change.
All of which makes it harder for the oil industry as a whole to attract investment, which is its life blood. The International Energy Agency estimates that global upstream spending in 2019 will total $505 billion, a 4% increase in real terms from the previous year. This may be $300 billion below the peak reached in 2014 but it illustrates the mountain of cash oil producers have to spend to help meet world demand.
How long until peak oil?
And despite Thunberg’s best efforts, most forecasters agree the world will still need more oil for the foreseeable future. World demand for crude, which is currently ticking along at around 100 million barrels per day, is unlikely to plateau before 2030 in any energy transition scenario.
“The speed of the transition away from carbon-based fuels is uncertain, but is beginning to accelerate and will be influenced by external factors such as government environmental policies and regulations on greenhouse gases, plastics, and vehicle electrification,” said S&P Global Ratings in a research note in June.
However, the stakes for OPEC’s 14 members and its oil producing allies such as Russia couldn’t be higher. The majority of their economies and entire political systems depend on income from oil exports. Thunberg’s worthy cause to prevent climate change turning to catastrophe is in all our interests, but it is also threatening to their survival.
Barkindo isn’t a climate change denier. In Vienna, he said the “industry is part of the solution to the scourge of climate change”. If that is indeed the case, instead of bolting the doors shut to climate activists, OPEC and the oil industry need to open up, and come up with a coherent plan to make their case before it’s too late.
This article was previously published as a column in The Telegraph
S&P Global Platts editors’ pick of unfolding commodities trends. This week, record iron ore prices are crushing Chinese steelmakers’ margins and Germany’s coal-fired generation is under intense pressure from gas and renewables, while in European wholesale gas markets, Gazprom is registering ever-higher sales through its auction platform. Finally, OPEC is targeting a thorough rebalancing of the oil market, and we take a look at the latest moves in coffee prices.
1. Record iron ore prices could force Chinese mills to trim output
What’s happening? Spot iron ore prices reached their highest level since early 2014, hitting $126.35/mt CFR China for 62% Fe iron ore fines on July 3, before easing slightly. This is largely due to the supply outage in Brazil following Vale’s accident in January, and slower exports from Rio Tinto. S&P Global Market Intelligence has forecast a seaborne deficit of 36 million mt this year. Chinese producers of hot-rolled coil have struggled to pass these costs through to finished steel prices because of weak end-user segments, notably manufacturing. As a result, margins have been severely eroded with steelmakers at times producing below cost.
What’s next? With the iron ore shortage set to prevail this year and spot prices likely to remain high, much depends on the underlying strength of China’s economy to support domestic steel demand. Iron ore prices could become even more stratospheric, putting steel margins under intense pressure, and potentially resulting in Chinese mills trimming some output.
2. Cheap gas squeezes coal to new lows in Germany
What’s happening? German coal- and lignite-fired power generation fell 22% on year in H1 2019, as rising carbon prices and cheap gas helped trigger significant coal-to-gas switching. Plant closures and lignite mining restrictions as well as record wind and solar added further pressure. The trend is set to accelerate in Q3 with S&P Global Platts Analytics forecasting hard-coal generation to decline by over 60%, while gas generation is set to double compared with Q3 2018.
What’s next? Lignite, Germany’s single biggest power source, is now facing headwinds too. Utility EnBW has already taken a 900 MW unit offline in June, citing economic reasons. Lignite generation has proved much more resilient than coal in recent years, so the closure could be a sign of a new inflection point. Further out, year-ahead generation margins show modern coal plant again ahead of gas plants, with EUA carbon price and global gas price developments key for future profitability. Germany plans to phase out coal by 2038 at the latest with a first wave of hard-coal plant closures to be determined by auction.
3. OPEC targets oil stocks as it seeks to rebalance market
What’s happening? OPEC is dusting off plans for a new metric to measure the success of its ongoing 1.2 million b/d output cuts, but the main option on the table — targeting lower stocks — means the group would need much deeper and longer curbs to rebalance the global oil market. The group is now keen to adjust its target to take account of the creep in global oil stock capacity over recent years. It would focus on the five-year average for 2010-2014 rather than the current rolling five-year average.
What’s next? OPEC and its allies’ monitoring committee will meet in September to assess crude inventory levels and whether the new barometer is effective. Compared to the five-year average from 2014-2018, the 2010-2014 OECD oil stock average is 214 million barrels lower, or some 7.5% of the total 2.89 trillion barrels stock levels, IEA data show. The IEA report this week could give more clues on the market balancing narrative.
4. Gas sales soar on Gazprom’s European auction platform
What’s happening? Sales of Russian gas via the Electronic Sales Platform (ESP) have surged over the last months and are keeping momentum at the start of July. Last Thursday alone, Gazprom sold 229 million cu m, an all-time high. Gazprom uses the platform to market volumes that its long-term buyers turn down, within limits permitted by their take-or-pay contracts. Some ESP sales are also directed to new customers. The rising sales suggest Gazprom’s willingness to prioritize market share over value.
What’s next? Gazprom said it is “comfortable” with its current gas export strategy, and plunging hub prices in Europe should keep buyers interested in the ESP sales. However, planned maintenance on the Nord Stream pipeline in the second half of July will reduce Gazprom’s transport capacity by 150 million cu m/day, or 30%, and this could negatively impact volumes offered on the platform.
Bonus chart: Coffee prices stage rebound on new crop concerns
What’s happening? After years of constant declines, global coffee prices made a minor comeback this week on growing concerns over cold weather hitting crops yield in top-grower Brazil. The benchmark September ICE futures contract for Arabia coffee rose to a seven-month high Friday at up to $1.15/pound, the highest since November 2018, amid fears of frost damage in some of Brazil’s top coffee growing states. The price rally came two days after the International Coffee Organization trimmed its estimates for global coffee surplus this year. Strength in the Brazilian real against the dollar, which can discourages export sales by Brazilian producers, also supported prices.
What’s next? Traders will be keeping an eye on weather conditions as the Brazilian harvest progresses. The current cold front’s impact could be limited given forecasts of a global production surplus for the current coffee year (October-September), even as the ICO projects global demand for the commodity to rise by 2%, to 164.6 million bags.
Reporting by Paul Bartholomew, Andreas Franke, Paul Hickin, Fabio Reale, Robert Perkins and Marco Perkins. Edited by Emma Slawinski.